Definition and Significance for Listed Companies

Free float refers to the percentage of a company’s shares that are available for public trading on the stock market. It excludes shares held by insiders, such as founders, executives, and strategic institutional investors. These are the shares that retail and institutional investors can trade without restrictions.

Companies with a smaller public share availability often have founders or leadership teams retaining significant ownership stakes. This can signal strong alignment between management and shareholder interests. As a result, it may attract investors looking for founder-led businesses with a long-term growth vision and strategic focus.

For dual-listed companies, the available public shares on each exchange typically reflect only what is tradable in that specific market. Investors should evaluate these shares separately for each listing to fully understand liquidity.

A higher share availability generally means better liquidity. This makes it easier to trade without significantly affecting the stock price. In contrast, stocks with limited public availability may experience greater price volatility. This volatility, caused by restricted supply, often attracts investors seeking growth opportunities in tightly held companies.

While this metric provides insights into a stock’s liquidity and ownership structure, it’s essential to look beyond it. Factors like market capitalization, industry trends, and company fundamentals play a key role in making sound investment decisions.

Free Float and the Impact of Index Inclusion

An interesting dynamic of this metric lies in its connection to index inclusion, especially for indices like the ASX 300 and ASX 200. Companies with a value of publicly available shares between 200 million and 1.5 billion AUD often reach a critical range. At this point, they may qualify for these indices and attract significant attention.

When a company nears inclusion criteria, index funds and ETFs tracking these indices must purchase shares to replicate the composition. This forced buying drives up demand and often the share price. In addition, active investors may anticipate such inclusions. They often engage in preemptive buying to profit from the expected price appreciation, further amplifying the effect.

This phenomenon highlights the importance of monitoring a company’s tradable shares. Index inclusion can bring short-term price gains and improve liquidity. However, investors must focus on the company’s fundamentals to assess its long-term growth potential beyond this temporary boost.

Screening for Investment Opportunities

A quick filter of the almost 500 companies I follow based on a public availability of less than 35% and a market value of between $200M and $1.5B reveals interesting results. This group includes a mix of founder-led and dual-listed companies, where insider holdings or cross-listing arrangements limit the public availability of shares.

Some strong performances among these companies have likely been enhanced by their proximity to or recent qualification for index inclusion. For example, ASX:GYG stands out as an interesting case, as it seems the recent float was structured to intentionally limit the public share availability to drive demand.

 

---

Disclaimer: This information is provided purely for educational purposes. It takes no account of an individual’s personal financial circumstances and hence can in no way constitute financial advice. The above data may be subject to errors or inconsistencies for which the author takes no liability. It is imperative that all investors do their own research or if they need advice, seek it from a qualified financial adviser.